Facebook's IPO has been criticized roundly, and the lawsuits are now starting to fly. In the days leading up to the offering, both the amount of shares being sold and the offering price were increased significantly. While this might make sense on the back of some good news about Facebook, the only recent developments in their business were negative: the difficulty in monetizing mobile, slowing growth, and a quarter over quarter revenue decrease. Of course, given the unbridled optimism and enthusiasm some people have for Facebook, the IPO might have succeeded in spite of such warning signs. I assume that is what the underwriters were hoping for.
Not only was demand lacking above, or possibly even at, the IPO price, significant problems with NASDAQ's handling of trades caused delays and unconfirmed trades left and right. The media pointed out that some analysts for underwriters such as Morgan Stanley had communicated misgivings about Facebook's IPO valuation to important clients of the firms. This is an area of legal contention, but it seems that there is likely nothing technically illegal that occurred during the week of the IPO; analysts may have been allowed to share new opinions verbally without running afoul of disclosure rules.
This brings us to my favorite complaint heard throughout the coverage of Facebook: the IPO showed how Wall Street wasn't fair to the little guy because of information sophisticated investors might have been privy to compared to your retail John Doe. The naivete of the assumption that Wall Street should be "fair" in this regard is astounding. Of course a retail trader doesn't have as much information as financial professionals; they never do.
Regardless of whether or not analysts involved in the IPO may have quietly revised price targets down or expressed concerns to clients, retail guys don't have the same knowledge and understanding of Facebook's finances nor analyst research. Even the most well-informed retail traders who can break down accounting statements and dissect a stock's story don't have access to the amount and depth of analyst research that professionals do unless the retail investor is willing to pay large sums for it. Just because an analyst might have disclosed their new opinion on a stock doesn't mean John Doe ever sees this report. It isn't free disclosure.
Retail traders also don't have the market knowledge of professionals who spend every day around the markets and are plugged in. Is the rumor across trading floors that this IPO price will have a hard time being justifiable? What kind of volumes and order flow are coming across the tape right now? What are the derivatives markets telling us, and how will external or global events effect prices today? Most retail guys wouldn't know, as they don't have access to such information flow.
So, your average individual who traded this IPO doesn't understand the business all that well and doesn't have the market knowledge to see warning signs about a lack of price support or interest if such signs did exist. And people are upset and surprised they lost money? I'm more surprised John Doe ever makes money on a trade, but I chalk that up to the laws of probability.
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